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Euro zone cool to Geithner proposal

Brussels, September 17, 2011

US treasury secretary Timothy Geithner drew a cool response from the European Union (EU) policymakers when he urged them to leverage their bailout fund to better tackle the debt crisis and to start speaking with one voice.

In a 30-minute meeting with euro zone finance ministers on Friday, Geithner pressed for the 440 billion euros European Financial Stability Facility (EFSF) to be scaled up to give greater capacity to combat the bloc's debt malaise, a senior euro zone official said.

The US Treasury said of Geithner's role that he "did not advocate or oppose any specific policy prescriptions."

One analyst familiar with the proposal said it would involve the EFSF guaranteeing a portion - perhaps 20 per cent - of potential losses on euro zone debt, so that its capital would effectively stretch five times further.

Geithner's presence at the meeting underscored the depth of US alarm but ministers were resistant to Washington telling the 17-country euro zone and its finance chiefs what to do.

"He conveyed dramatically that we need to commit money to avoid bringing the system into difficulty," Austria's Finance Minister Maria Fekter told reporters after the meeting.

"I found it peculiar that even though the Americans have significantly worse fundamental data than the euro zone, that they tell us what we should do and when we make a suggestion ... that they say no straight away."

Fekter said there had been particular disagreement over suggestions that Europe should find more money to fight the crisis.

When German Finance Minister Wolfgang Schaeuble explained that would not go down well with taxpayers and that the only way to fund it would be a financial transaction tax, Geithner flatly ruled that out.

However, one senior official said Geithner's proposal on leveraging the EFSF had neither been rejected nor endorsed.

"It is being discussed," the official said, emphasizing that the priority was for euro zone national parliaments to ratify new powers for the EFSF agreed in July so it can lend to countries under attack in the markets and buy sovereign bonds to prop up struggling states.

Geithner was the head of the New York Federal Reserve at the height of the 2008-09 financial crisis where he helped develop an emergency loan facility that was used to help restart the frozen asset-backed securities market.

While no one described the gathering as ill-tempered or heated, it appeared clear from the reaction afterwards that Geithner and the Europeans did not see entirely eye-to-eye.

Jean-Claude Juncker, the chairman of the Eurogroup, said he was not prepared to discuss issues privy to the euro zone with someone from outside the currency bloc.

"We are not discussing the expansion or increase of the EFSF with a non-member of the euro area," he told reporters.

He also ruled out any further fiscal stimulus, something Washington has also called for. "Fiscal consolidation remains a top priority for the euro area," he said.

In a separate development that could have implications for Greek debt sustainability, financial sources told Reuters less than 75 per cent of private creditors had agreed to take part in a bond swap scheme aimed at keeping Athens afloat, well below the 90 per cent target. The measure is a vital part of a second Greek bailout agreed in July.

Belgian Finance Minister Didier Reynders said one option could be for the EFSF to make up the difference while Greek bankers say a shortfall could be covered from funds set aside to support banks in need.

With most economists saying a Greek default is inevitable at some point and the much larger Italian economy - which would be too big for the euro zone to bail out - not out of the firing line despite approval of a new austerity package this week, the pressure is on to act.

A Reuters poll of more than 50 economists across Europe gave a 65 percent chance Greece would default with half of them saying it would do so in within 12 months. Few expected it to be forced out of the currency bloc.

Speaking to a group of policymakers and bankers after the meeting, Geithner said the EU needed to end "loose talk" about a break-up of the euro and work more closely with the European Central Bank on solutions.

"What is very damaging (in Europe) from the outside is not the divisiveness about the broader debate, about strategy, but about the ongoing conflict between governments and the central bank, and you need both to work together to do what is essential to the resolution of any crisis," he said.

"Governments and central banks have to take out the catastrophic risks from markets ... (and avoid) loose talk about dismantling the institutions of the euro."

The ECB reluctantly agreed last month to buy the bonds of Italy and Spain after they came under market attack, on the understanding the EFSF would take up the cudgels once changes to the fund agreed in July are in place. That was too much for some in the ECB -- the top German official at the bank, Juergen Stark, announced his resignation last week.

"We are observing tensions in sovereign risk in the EU area, which we consider part of global tensions. It calls for us being alert ... putting our house in order," ECB President Jean-Claude Trichet told reporters.

In a news conference after finance ministers met alone to discuss the specifics of the crisis, Juncker and the European commissioner for monetary affairs, Olli Rehn, focused on the need for Greece to stick rigidly to commitments it has made.

Inspectors from the ECB, EU and IMF should report back on progress in early October, Rehn said, meaning that the next disbursement of aid to Greece from its first bailout - vital to avert imminent default - could be paid by mid-October.

A Greek government official said the heads of an EU/IMF inspection team would not arrive in Athens as planned on Monday to resume a performance review due to technical reasons and will instead hold a teleconference with the finance minister.

"The intention is to meet the fiscal targets for this year and next year without delay, without exception and deviations," Greek Finance Minister Evangelos Venizelos told reporters.

With no dramatic new policy unveiled, the euro gave up some of the gains seen in the previous session when the ECB and other top central banks joined forces to offer more dollar liquidity to banks struggling to secure funds.

"All the headlines that are coming out of the Ecofin meeting are pretty negative and the euro's resilience after the coordinated action from central banks on Thursday seems to be coming off," said Jeremy Stretch head of currency strategy at CIBC World Markets.

Among the issues finance ministers must try to resolve is a row over the terms of a second bailout for Greece, with countries such as Finland demanding collateral in return for new loans -- a major obstacle to a deal.

An adviser to Finnish Finance Minister Jutta Urpilainen said it would probably not be until early October that the dispute was fully resolved.

Collateral is a must for Helsinki but officials say a solution is coming together whereby it is made so expensive to demand it that no country but Finland will take it.-Reuters